Meme stocks are roaring again. Yes, again

What’s going on with GameStop’s stock doesn’t make sense to a lot of people. The struggling video game retailer’s stock has been making stupefying moves this month, wild enough to raise concerns from Wall Street to the White House. Photo / AP

Meme stocks are shaking Wall Street once again on Monday. And, as is usually the case, it all started online.

A post on Reddit on Sunday indicated Keith Gill, a central character in the original 2021 meme stock crack, had built a sizeable stake in GameStop. Shares of GameStop were up 35.1 per cent to US$31.27 in the early afternoon after jumping above US$40 right after the opening of trading. AMC Entertainment, another popular meme stock, rose nearly 16 per cent.

If it all sounds familiar, it should. It was only three weeks ago that GameStop shares were soaring on excitement about a post on social media by another account tied to Gill. At that time, a Twitter account associated with him made its first posting since June 2021, though the gains fizzled relatively quickly.

Ever since bands of smaller-pocketed and novice investors began taking stock prices of downtrodden companies to breathtaking heights three years ago, the potential for more flare-ups has been obvious.

This time, Wall Street is better prepared to more easily digest the sharp movements, experts say. But some things remain firmly the same. Chief among them is the risk associated with such volatile stocks, where prices can soar — and crater — quickly. Here’s a look at what’s going on:

What triggered the latest moves?

Gill has become a hero online, known for continually professing how much he liked GameStop’s stock as it charged to heights in 2021 that professional investors saw as irrational. He even said it in testimony before Congress when it was looking into the meme-stock craze.

On Sunday, an account on Reddit with the handle Deep F- - - - - - Value shared a screenshot showing an account holding 5 million shares of GameStop stock, plus options to buy more. The total holdings were worth US$181.4 million as of Friday’s close, and the screenshot looked just like ones that the account had shared during the supernova run for GameStop in early 2021.

It was the first post for the Reddit account since April 2021, when it had posted what it called a “final update” on its “yolo”, or you-only-live-once, investment in GameStop. Euphoria erupted quickly, with users on Reddit exclaiming “I’M HERE FOR HISTORY!” and “If he’s still in, I’m still in.”

When the stock market opened for trading on Monday, GameStop immediately soared.

Should the stock be rising that fast?

Financial analysts and professional investors who care mostly about numbers such as profits, cash flow and interest rates would say no. GameStop’s financial prospects did not change over the weekend, before the dizzying swings in its stock price.

Conventional wisdom says a stock should eventually settle at a price that reflects how much cash the company is generating, where interest rates are heading and other factors. But in the short term, what sets a stock’s price is how much investors are willing to pay for it. And, on Monday at least, people are willing to pay much higher prices for shares of GameStop.

How could the reaction have been so quick?

This is the new age of investing, one where anyone can buy a stock with zero commissions simply by tapping a few times on a phone. It’s the culmination of years of innovation. At each step of the way, consumer advocates hailed the broadening playing field, which allowed more people to invest in stocks and build wealth. But they also warned easy access could encourage people to trade too quickly or too rashly.

How is this time different from 2021?

Meme-stock companies have more shares trading in the market than they did in 2021, and that could lessen the chances of what’s called a “short squeeze”, according to Nick Battista, director of market intelligence at tastylive, a streaming network geared towards options traders.

A short squeeze is a relatively rare event that can yield eye-popping profits for people riding the wave. When investors bet a stock’s price will go down in the future, they “short” it by borrowing shares and selling them. Later, if the price does indeed fall, the short sellers can buy the stock, return the borrowed shares and pocket the difference.

But when a highly shorted stock rises in price quickly, short sellers sometimes scramble to get out of their trades. They can do that only by buying shares of the stock, which can set off a self-feeding cycle that makes the price shoot even higher.

Such a short squeeze probably contributed to GameStop’s thrilling ascent in 2021, but the SEC’s staff said it was a small fraction of the overall purchases and that GameStop’s stock stayed high even after short sellers had got out of their trades.

GameStop in March had roughly 305.9 million shares of its stock trading in the market, more than four times the number of shares it had in March 2021. Such growth “greatly increases the amount of activity needed to squeeze higher” for GameStop and other meme stocks, Battista said. “Can they move higher? Sure, but it’s going to be a tougher task this time around.”

What are the risks of joining in?

It’s important to know the momentum can shift just as suddenly the other way. It took only four weeks in 2021 for GameStop’s stock to go from less than US$5 to more than US$120. But it has yet to touch that price again. Even after its big jump in recent days, GameStop shares can be bought for about US$30.

After briefly reaching US$390 during the summer of 2021, AMC’s stock is now at roughly US$5.